Optimizing overall business performance

By David Paspa.

The earth is flat. Well, it used to be. If you lived in early Mesopotamia, you would have had no doubt. That invalid assumption slowly started to change as early as the 5th or 6th centuries BCE. Even then, you still assumed earth was the centre of the universe. That turned out to be an invalid assumption as well.

It is interesting how the gaining of knowledge changes our view of the world and how we fit into it.

The world has changed profoundly in less than a couple of hundred years. The industrial revolution, mass production and the division of labour have developed and refined our ideas about business management, structure and operation. Even so, modern business management theory and practice is not much more than 100 years old. Historically speaking, the way we work today is a very recent development indeed.

Could it be that some of our current knowledge is based on some invalid assumptions?

The Goal

Why are you even in business? What is your goal? Is it your goal to make people busy? Is the reason you are in business only to make sure people have plenty of work to do each and every day (and a liberal dose of stress to go with it)? Probably not.

If you are in a for-profit business then your fundamental goal is to make money. In fact, you strive to make more money, now and in the future. Profit is one of a number of necessary conditions to being in business.

Human Nature

It is human nature to deconstruct complex systems into their component parts. In a business, we usually do it according to functional boundaries. We create departments for accounting, human resources, production, engineering, logistics, research and development, sales, marketing and so on. We know these various departments have interdependence within the business but we have a tendency to manage and operate them as individual components.

We set performance targets for each department and even for the individual machines and people working within each department, usually based on some measure of local productivity or efficiency. We do this because we assume the way to optimise overall business performance is for each and every component part of that business to always operate as productively and efficiently as possible.

The way you measure your business performance is critical because people tend to behave the way they are measured.

Think Global, Act Global

We are not in business for the sake of being busy. We are in business to maximise overall business profit resulting from revenue growth through sales.

If we are concerned with maximising our overall profit, it makes sense that we should be more concerned with overall, global business performance measures than we are with local performance measures. We certainly would not want to optimise the local performance measures of any one machine, workstation, person or department at the expense of overall, global organisational performance, would we?

The question we need to ask ourselves is, “Will optimising every part of our business, everywhere, all the time, result in maximum profit?”

Current business management practices assume that it will and cause us to balance capacity within the business so all resources are always busy. We ignore most of the interdependence between the different parts of our business and then collect every little piece of data about every part of our business and try to manage at the smallest resolution possible. We make strategic decisions about overall business performance based on their perceived impact on local optimisation measurements.

It seems we bury our heads in the localised details of everything and then expect optimised performance of the overall business to be an inevitable outcome, which will somehow just take care of itself. The problem is, there is variability in the things we know and uncertainty in the things we do not know.

Focus

If the definition of focus is “the concentration of attention or energy on something”, then it follows that focusing on everything is the same as not focusing on anything.

The weakest link of a chain determines its overall strength. If you want to improve the strength of the entire chain you need to improve the weakest link. Similarly, the overall flow rate of water through a pipe will be limited by the smallest constriction. If you want to improve the flow rate through the entire pipeline you should focus on the point that constricts it the most. In both examples, improvement in strength or flow comes suddenly as a step-change in performance, not imperceptibly over years of uncertain effort.

In a business context, rather than trying to balance the capacity of each part of our business and trying to optimise everything, everywhere, all the time, only to keep everyone busy, we should consider the flow of money through the interdependent parts of our business and then identify which points are restricting that flow the most.

In a production environment, perhaps we can equate the flow of money with the flow of inventory. In a services environment, perhaps we can equate the flow of money with the flow of value added to customer requirements. We need to ask ourselves, “How can we increase the flow rate?”

Those things that constrain the flow more than any other represent the points of greatest leverage we have over the overall performance of our entire business system. By optimising the rate of flow through the constraints, we optimise the overall system. We need to focus our limited resources on those constraints.

People should be measured and rewarded on their alignment with overall system optimisation by ensuring they were doing the things necessary to optimise the performance through the constraints and therefore the entire system, even if it means localised productivity is down. This would result in true goal congruence. Everybody in the business would be focused on the same global measurements, not on competing, local measures.

Shift Your Paradigm

To shift your paradigm to one of global performance optimisation, why not think about the following for a while:

Identify your constraints. What are the one or two things that are holding you back more than anything else? That is where you need to focus.

Decide how you can exploit these constraints. How can you maximise financial throughput through them? There are proven methods for exploiting constraints in manufacturing, projects, logistics, sales, marketing, professional services, healthcare and more.

Subordinate the rest of your business to the above decisions, even if it means some localised, non-constraint productivities go down. Remember, your goal is overall systemic performance, not keeping everyone busy. Goal congruence, through the alignment of personal goals with overall systemic performance goals, can be very powerful.

Only after you have exploited your constraint fully should you consider elevating its capacity through capital investment.

Once you have broken your constraint, a new one will emerge, so go back to step one. Now you have a process of ongoing improvement.

By letting go of the invalid assumption that local optima lead to optimised overall business performance and maximum profit, you might just make more money, now and in the future, and be less busy doing it.

David Paspa is a professional engineer and a business owner since 1987. He is currently developing a knowledge-management and business-process automation IT appliance and cloud service aimed specifically at legacy systems integration, business continuity and compliance via a low-cost, instantaneous deployment. His system provides a ‘thinking bridge’ between the traditional local optimisation approach to business and global systemic performance measurements. David can be contacted at david.paspa@ka.com.au.